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Supreme Court of New South Wales considers whether a former employee breached a restraint of trade clause prohibiting competition “directly or indirectly” in Provida Pty Limited v Sharpe

Where a former employee is subjected to a post-employment restraint of trade clause which prohibits competing directly or indirectly against his or her former employer, the fact that the competing services are provided through a separate company of which the former employee is neither an officer nor a shareholder will not circumvent the restraint of trade clause.

Provida Pty Ltd (Provida) is a software company providing software support services and Sharpe is a former employee of Provida who was subjected to a restraint of trade clause in his employment contract. Among the obligations imposed on Sharpe, clause 16(2) of the employment contract precluded Sharpe, for 2 years after termination of his employment with Provida, from “directly or indirectly”:

persuading an entity who has dealt with Provida during the 12 months prior to the termination of his employment, from ceasing to do business with Provida; and

trading in competition to Provida.

Shortly after Sharpe gave notice and ceased his employment with Provida, two of Provida’s largest clients, CFCL Australia Pty Ltd and ITW, with whom Sharpe had a working relationship as an employee of Provida, terminated their arrangements with Provida. Sharpe, through a corporate entity called Magni Pty Ltd (Magni), continued to provide software support services to CFCL Australia and ITW. Magni was a sole shareholder and sole director company but Sharpe was neither an officer nor a shareholder of Magni.

The Court refused Sharpe’s claim that there was no legitimate interest that justified the restraint against competition. Based on the facts of the case, the imposition of a restraint of trade clause was appropriate for the protection of confidential information and business methods.

Further, the Court held that Sharpe’s conduct was clearly “directly or indirectly” trading in competition. The fact that the services were provided through an incorporated entity of which Sharpe was neither an officer nor a shareholder did not circumvent the restrictions.